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Lessons I've Learned From Traders

Maybe we're not so different, after all...

One day, while proselytizing to a day trader friend of mine (as I often do) about the vast superiority of investing over gambling, I had an epiphany: Traders have a way of viewing the markets that can be of tremendous benefit to investors. I'd like to share with you these lessons, and hopefully they will be as revolutionary to you as they were to me.

Traitors! I mean, traders!It's easy to hate traders -- they are bold and risky people who can make (or lose) more in a day than any investor, all without glancing at a financial statement. They go against everything we preach -- conservatism, due diligence, patience. They're heathens!

But take a closer look at what they do besides create market turmoil: Trading is an amazingly disciplined... discipline. They act with no emotion for the companies they trade -- only emotions for the money. They get up every morning and read, read, and read some more. Though they may not care about the company, they tend to catch the minute details that many investors miss. Most importantly, traders often try to break away from the herd -- they're first in, and first out.

For the trader, stock picking isn't a popularity contest -- it's war.

Be cold, be fierceThe crappy attitude inherent in every trader is a fantastic weapon. An uncle of mine, a former captain of industry, wisely told me, "My greatest asset is my [expletive] attitude." My 16-year-old self, though bewildered at the time, never forgot that statement, and I keep it in mind when looking at stocks.

Like my uncle, the trader views his game as a series of landmines. And the one who steps on the fewest mines wins the day. As investors, we are often too optimistic and altruistic. Many of us want to believe in Facebook(Nasdaq: FB) because of what it represents in the progress of mankind. Facebook connects people from all over the world and lets them interact day and night (albeit through a soulless machine conduit). The investor, specifically the long-term breed, looks to the future and invests with ambition and hope. The trader, ever skeptical of the coming minutes and hours in the trading day, wants to get his take and get out.

I'm not advocating for you to jump in and out of stocks like it's the Jacuzzi you wish you'd never bought, but there is a good lesson here. Realize that, even though you are handing over your hard-earned cash and that the letter to shareholders says how much the CEO (who has never met you) deeply cares about you, in the end, businesses are here to make money, and in some cases take your money. If your investment loses, you won't get a letter of apology and a free Slurpee coupon.

The next time you look at a company, have the same cold attitude the trader and my uncle do. Be shrewd, and you'll find yourself making fewer mistakes.

VacuumsI used to work for a fund that supplemented its long-term holdings with trades. Though I never participated in the trading, I witnessed the daily prep. Starting hours before the market opens its eyes, our traders were reading and listening. RSS feeds were set up from every newswire, and with Google search alerts on target companies. Our traders had no intrinsic interest in the companies, but they knew everything about every company they could find before the opening bell.

The beauty of their trade is the amount of data they process. As an investor, we can only benefit from knowing more data. Note that I use that word instead of information, because I am not suggesting listening to an analyst on CNBC is useful... it isn't. Investors in Green Mountain Coffee Roasters(Nasdaq: GMCR), if they still exist, probably know the fundamentals of the company. They have read the financial statements, understand the razor/razor blade business model, and believe in the product itself. But if investors had an 8-K alert (8-Ks are SEC general information releases) forwarded to their email (as many traders do for stocks of interest), they would have seen that this week, a director resigned from the company. They would have also seen that former Fortune Brands CEO Norm Wesley has joined the Green Mountain board.

It may sound nice, but under Norm's control of Fortune, the company overpaid for new acquisitions, overdiversified the portfolio, and resulted in the company being seized by activist Bill Ackman. Fortunately, Ackman turned the company around and arranged a tremendously successful spinoff.

Closely monitoring daily data is a tool that traders use every day, and though that may not seem like much in the long run, it contributes small pieces to a big puzzle for investors.

Jack be nimbleOne of the best things I've learned from the art of the trader is independent and swift decision-making. An amateur retail investor may hear about a company's stock going higher and higher, like Netflix. They hesitate at first, because who knows what it'll do, right? But as the stock continues its meteoric rise, it becomes more tempting to the guy who didn't get in on the action and wants a piece. The result is buying in at the high and losing out big time. As many of you know, Netflix blossomed from a small-cap IPO to an absurdly overvalued $305 stock. Today it trades closer to Planet Earth at a little over $64 per share.

The trader would have seen the early momentum in Netflix and maybe hopped in and out of the stock as it made its run. When it started trading at triple-digit earnings multiples, many traders started going short as the laggard investors piled in.

Again, this is not to suggest leap-frogging around the stock market. Over time, long-term investors have consistently outperformed traders (for instance, the Motley Fool Stock Advisor recommendations of Netflix from 2003 on are still smashing the market). But take this lesson: If you notice a stock gaining traction and feel it's fairly priced given the growth prospects, consider making your move. By the time it's on every news station and the newspaper salesman is telling you to buy, it's time to sell.

The time is nowYou may be thinking, "This is malarkey! Traders do nothing but feed fear and greed into the markets. Their actions have nothing to do with the companies themselves." Well, let me give you another nugget of advice from my sage uncle: "The world runs on [baloney]. So get used to it."

You will only benefit from incorporating these lessons from our arch-nemeses. They may very different from us, and we may question their humanity behind their backs -- I often do -- but don't be afraid to learn from your foes.

Author

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.